Note that the rate on the I bond went up today to 7.49%. These look very attractive to me in a taxable account for reducing equity portfolio risk.

The rate of interest is established at the time of purchase and is guaranteed for 30 years. The interest on the I bonds accumulates tax free until you cash them in and even then they are free of state tax. You can't cash the bonds in for the first 6 months after purchase. If you cash them in during the first 5 years you lose 3 months interest. After 5 years you can cash them in without penalty at any time up to 30 years.

These also seem like good investments for childrens' future educational needs, since if used for education you can claim the education tax exclusion for the interest (in effect a totally tax free savings method, assuming your adjusted gross income is low enough). I bonds can be purchased online at www.savingsbonds.com in up to $500.00 increments. (I'm thinking of buying a few thousand dollars worth and racking up some frequent flyer miles.) I think you can also buy them from your bank.

The total annual limit for I bonds is $30,000 per person. Does anyone see any downside to I bonds? The returns seem at least as good as the Vanguard bond index funds.

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